SAO PAULO: Brazilian assets are surging on expectations that Flávio Bolsonaro will address the country’s mounting fiscal problems and pave the way for interest rate cuts as he becomes the surprise favourite to win the presidency in an Oct 25 runoff against Luiz Inácio Lula da Silva.
Bolsonaro had 47% of the vote in the first round of elections on Sunday, compared with the incumbent’s 45%.
Investors had widely expected left-wing Lula to come in ahead. Now, the race appears to be Bolsonaro’s to lose, JPMorgan Chase & Co said in a note.
Traders quickly boosted bets that a more pragmatic economic programme would allow the country to lower rates that rank among the highest in the world.
Swap rate contracts tumbled more than 130 basis points, and the real soared as much as 5%.
The nation’s benchmark Ibovespa stock gauge jumped the most since 2020, closing 7.7% higher.
Investors traded over US$8bil in shares of EWZ, the world’s largest exchange-traded fund tracking Brazilian stocks with about US$9bil in assets, on Monday, the most for any day since the fund’s inception in July 2000.
“Flavio is seen as a better option in the eyes of investors,” said Daniela Da Costa-Bulthuis, a portfolio manager at Robeco Institutional Asset Management.
His intention of implementing a fiscal consolidation plan would open space for the central bank to continue reducing rates, abandoning “ultra-restrictive monetary policy”, she added.
Following Sunday’s vote, Citigroup Inc is recommending investors add to bullish wagers across Brazilian assets, touting the nation’s stocks and local government bonds due in 2031, so-called NTN-Fs.
JPMorgan upgraded Brazilian stocks, with strategists seeing as much as 20% upside on the prospect of a more fiscally disciplined government.
A Bolsonaro presidency would likely bolster investor confidence, with longer-dated local bonds standing to benefit most as markets price in faster and deeper fiscal adjustments than under Lula, according to Olga Yangol, head of economic research and emerging-markets strategy at Crédit Agricole. — Bloomberg
